9/03/2009 @ 7:20AM

HMV Downloads 7Digital

In a bid to boost its online presence, HMV is taking a 50% stake in 7digital, the music download website. The British retailer, which faces tough competition from supermarkets, online retailers and illegal digital downloading, said on Thursday it hopes 7digital will contribute to the enhancement of its sales of books and music online.

HMV
, which runs music, DVD and video games shops under its own name as well as Waterstone’s bookstores, announced the 7.7 million pound cash ($12.6 million) deal as it posted a 1.8% fall in underlying sales for the first 18 weeks of its financial year.

Simon Fox, chief executive of HMV, said 7digital would help HMV strengthen its position in the digital market. “We believe 7digital is the best partner to help us accelerate our growth in digital entertainment and to become a major player in the market for legally downloaded entertainment,” Fox said.

HMV, which already offers six million digital music tracks and videos through its Web site, said in a press release that it would benefit not only from 7digital’s expertise and technology, but also from the growth the firm is enjoying through partnerships with digital entertainment services, including Spotify and Blackberry.

The response from analysts was mixed. “We believe this has the potential to put HMV’s digital content on the front foot for change, rather than playing catch-up to market developments,” said KBC Peel Hunt analyst John Stevenson.

But taking a stake in 7digital will only add a minor improvement to sales in the short-term, said Kate Calvert, an analyst with Shore Capital in London. “The deal is not so significant for HMV as it makes most of its sales in traditional retail,” she added.

With video sales falling, HMV could use a boost in sales elsewhere. Sales of video games fell 3.4% at Waterstone’s in the first 18 weeks of HMV’s financial year, and dropped 12.6% in international markets. Yet same-store sales in the U.K. and Ireland rose 1.7%, helped by big market share gains following the demise of rivals Woolworths and Zavvi around the end of last year. (See “Zavvi Downfall Helps HMV.”)

Following the trading update, analysts at Nomura kept their full-year profit forecast of 74.7 million pounds ($121.9 million), with a 2 million pound ($3.2 million) cut to their international estimate offset by an upgrade for the U.K. They also also kept their buy rating on the stock.

“The first quarter indicates that HMV is well positioned ahead of the key Christmas trading period… with gross margins and costs under tight control. International sales remain challenging, although self help initiatives are in place to limit potential downside,” Nomura told clients.